The policy of the central bank of decreasing the money supply in order to decrease aggregate demand is called _____________________ and works by _____________________.

• contractionary monetary policy / increasing interest rates

• contractionary monetary policy / decreasing interest rates

• expansionary monetary policy / decreasing interest rates

• expansionary monetary policy / increasing interest rates

In the money market, if the quantity of money demanded is greater than the quantity of money supplied, the interest rate will

• rise

• fall

• remain unchanged

• rise or fall depending on the amount of excess demand for money

If an economy faces a deflationary gap, the appropriate policy response may be

 

• expansionary demand-side policies

• expansionary fiscal policy

• expansionary monetary policy

• all of the above

Contractionary monetary and fiscal policies may be called for when the economy is

• in a deflationary gap

• in an inflationary gap

• in full employment equilibrium

• at a trough (downturn) in its business cycle

Fiscal policy involves

• actions taken by the government to promote a more equal distribution of income

• actions taken by the central bank to influence the money supply and interest rates

• tax policies of the government

• government policies on taxes and its own expenditure undertaken to influence aggregate demand

Which of the following can work as automatic stabilisers?

• progressive taxes and unemployment benefits

• regressive taxes and unemployment benefits

• progressive taxes and subsidies

• unemployment benefits and subsidies

When the government increases its spending by borrowing, it may lead to a decrease in private investment. This is called

• balanced budget

• crowding out

• industrial policy

• deregulation

Expansionary fiscal policy undertaken by the government involves

• decreasing taxes and increasing government spending

• increasing taxes and decreasing government spending

• increasing taxes and increasing government spending

• decreasing taxes and decreasing government spending

Rather than focus on the objectives of low inflation and low unemployment, some central banks pursue an alternative policy that involves

• avoiding crowding out

• setting an inflation target

• achieving a balanced budget

• reducing the level of public debt

Which of the following is not among the strengths of fiscal policy?

• it can lead to crowding out

• it can pull an economy out of deep recession

• it can target specific sectors of the economy

• it can lead to increases in potential output through its supply-side effects